Occupational Hazard: How State Licensing Is Invading Tribal Sovereignty

States license more than 1,100 occupations in America, including professions as diverse as boxing in Nevada, hearing aid sales in Michigan, and talent agents in Connecticut. For small dollar lending, some states, like Washington, require a consumer loan license to offer credit services while other states, like Hawaii, mandate licenses for collection on loan debts.

Attributing to the prevalence of online lending, small dollar lenders now must navigate a myriad of complex licensing and registration rules across competing jurisdictions. With conflicting interests, lenders are left with many questions: Do I need a license in every state I conduct business? Do I only need a license in my home state (similar to banks and credit card companies)? Do tribal lenders have an obligation to seek state licensure?

As to the questions surrounding tribal lending and state licensing, it is important to first review the historical relationship between sovereign tribal nations and the several states of the United States. The Supreme Court ruled nearly two centuries ago in Worcester v. Georgia that state law has no force in Indian Country. In Worcester, a missionary to the Cherokee Nation was jailed and sentenced to hard labor by the state of Georgia for entering Indian territory in violation of state law, despite the clergyman’s authorization to proselytize to the Cherokees by the federal government. The Supreme Court overturned Worcester’s conviction and set in motion a guiding principle of tribal sovereignty- a sovereignty that was extended in recent years to tribal commercial activities on and off the reservation.

In spite of almost two hundred years of Supreme Court jurisprudence, the Consumer Financial Protection Bureau (CFPB) has chosen to ignore vaunted high court precedent and sue a collection of tribal lending entities in part for their refusal to obtain a state lending license. The use of a federal law to impute the violation of state law on a sovereign tribe is unprecedented. The CFPB’s tactics also belie the growing movement to eliminate a burgeoning state licensing system that threatens to stifle competition and job growth.

Earlier this summer the Federal Trade Commission (FTC) convened a roundtable to discuss the overdevelopment of state occupational licensing. The FTC explained:

“In many situations, the expansion of occupational licensing threatens economic liberty. Unnecessary licensing restrictions erect significant barriers and impose costs that cause real harm to American workers, employers, consumers, and our economy as a whole, with no measurable benefits to consumers or society. These restrictions can: (1) close the door on job opportunities for people who are ready to work; (2) prevent workers from marketing their skills to employers and consumers; (3) reduce entrepreneurship and business innovation, insulating current service providers from new forms of competition; and (4) stifle price, quality, and service competition among professionals, which hurts all consumers.

Based on recent studies, the burdens of excessive occupational licensing – especially for entry- and mid-level jobs – may fall disproportionately on our nation’s most economically disadvantaged citizens. Even in professions in which licensing makes sense, harm often arises from the complexity and duplication of state-by-state licensing requirements and fees, combined with a lack of reciprocity among states.”

The concerns expressed by the FTC are not a recent phenomenon within the agency. The Commission drew similar conclusions in a study conducted back in 1988. Some states appear to be acknowledging these concerns and taking steps to resolve the inherent issues with over-regulation of industry.

In Arizona, the state is eliminating licensing requirements that limit entry and competition in certain fields. Delaware recently moved to strengthen its regulatory board’s authority to reject licensing rules that fail to serve a public interest. The Michigan Office of Regulatory Reinvention recommended the elimination of 18 different licensing systems in 2014, including one for interior designers. Nebraska reported that 25% of the state’s workforce operates under one of the 200 current occupational licenses with the state set to reduce or extinguish requirements for a number of licenses in fields like school bus driving and cosmetology.

Specific to lending, the federal Office of the Comptroller of the Currency (OCC) has proposed a FinTech chartering system for non-bank financial institutions, creating a de facto federal license/charter for online lenders. In explaining its decision to propose FinTech charters, the OCC wrote:

“Is the nation better served when banking products are provided by institutions subject to ongoing supervision and examination? Should a nonbank company that offers banking-related products have a path to become a bank? And, what conditions should apply if a nonbank company becomes a national bank?”

The proposal immediately incited court challenges by the Conference of State Bank Supervisors (CSBS) and the state of New York. In further response to the OCC’s proposal, CSBS has proposed their own multi-state licensing system in an attempt to retain regulatory control and streamline licensing for online lenders. If it survives legal challenge, the federal FinTech charters will be voluntary. But as the states have shown, they are unafraid to band together to preserve their authority over online lending. However, even in areas like tribal lending where states lack authority, the CFPB seems to be trying to grant states the power to regulate tribes in ways that directly conflict with centuries of federal-tribe trade relations. The lack of viability of the CFPB’s assertions against tribal lenders, coupled with the future of federal FinTech chartering, could spell the end to arbitrary state licensing schemes in online lending.